Investors are becoming friendlier with the idea of an interest rate hike this month, as more Fed governors continue to express their support for a third yearly increase to the federal funds rate.
Fed Governor Christopher J. Waller spoke on Friday, and his comments add additional certainty to the prediction of another rise to the federal funds rate on September 20.
Earlier this week, several key figures from the Federal Reserve confirmed that bringing down inflation is the body’s main goal and manipulating interest rates, its main tool to achieve that end.
On Wednesday, Fed Vice Chair Lael Brainard said that "we are in this for as long as it takes," while Loretta J. Mester, CEO of the Federal Reserve Bank of Cleveland and a voting member of the committee, expressed that the rate should be above 4% by early next year and remain there throughout 2023.
On Thursday, the European Central Bank confirmed a similar decision to raise the interest rate by 75 basis points to 1.25% in an effort to bring down inflation to 2.3% in 2024.
The Fed, for its part, is looking to do the same, and return to the ideal place of 2% annual inflation.
“This is a fight we cannot, and will not, walk away from,” said Waller in his speech at the 17th Annual Vienna Macroeconomics Workshop.
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Recession Or Not?
The Trump-appointed economist said that “the fears of a recession starting in the first half of this year have faded away.”
The country’s gross domestic product has been in decline for two consecutive quarters, in line with many definitions of what a recession should look like. However, the National Bureau of Economic Research —the body in charge of officially declaring a recession in the U.S.— does not share the same definition.
Mainly, it’s the resiliently strong U.S. labor market which puts a question mark on the notion of whether we’re currently in a recession.
In late July, Fed Chair Jerome Powell said that the real reason we’re probably not in a recession “is that the labor market is just sending such a signal of economic strength that it makes you really question the GDP data.”
For Waller, “the robust U.S. labor market is giving us the flexibility to be aggressive in our fight against inflation,” and that means upticking the federal funds rate.
For some financial analyst firms, like The Vanguard Group, the probability of the U.S. entering a recession within the next 12 months is 25%, but that likelihood climbs to 65% within the next 24 months.
However, while the possibility of a recession remains on the table, Waller is increasingly certain that the first half of 2022 didn’t show one.
“I think the argument that we entered a recession in the first half of 2022 has pretty much ended—we didn't,” Waller said.
“The absence of any indication of a recession in spending or employment data buries that recession argument a little deeper.”
The Federal Funds Rate To Go Up In September
On September 20 and 21, the Fed’s Federal Open Market Committee will confirm the decision to raise the federal funds rate by either 0.5% or 0.75%, putting the funds rate range at between 3% and 3.25%.
Supply has been hit hard by sequels of the pandemic, the war in Ukraine and further shocks to the food, energy, and semiconductor sectors.
“The FOMC's goal is that the tightening in monetary policy slows aggregate demand so that it is in better alignment with supply across all sectors of the economy,” explained Waller.
If the spike in interest rates is confirmed, businesses should prepare for reduced demand until the market reaches a point of balance with today’s disrupted supply chain.
For many businesses, a push on growth is becoming the main strategy for hedging against upcoming drops in demand.
Waller said he’s in support of “a significant increase” to interest rates that would further slow down demand and allow inflation to decrease by balancing it with today’s shrunk supply: the current imbalance between strong demand and a supply that struggles to get back to regular levels is believed to be the main root of inflation.
Waller said that based on all of the data that the government has received since the FOMC's last meeting, he believes the policy decision at the September meeting “will be straightforward.”
The official is in favor of tightening monetary policy into 2023, but urged his colleagues to act only on incoming data. For him, only hard data can answer the questions of "how high?" and "for how long?"
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